Bitcoin Fundamental

WHAT IS BITCOIN   

 

Bitcoin is a so-called virtual currency that has been devised for anonymous payments made  entirelyindependently of governments and banks. In recent years, Bitcoin has generated a great deal of attention on several fronts. Bitcoin payments are based on a new interesting technical solution and function differently to traditional payments. In certain payment situations, Bitcoin can bring advantages in the form of lower costs, rapidity, anonymity, etc. over traditional payment methods. However, usa  ge can also be more risky becauseBitcoin is not directly covered by the laws that govern other payment mediation. 

Weak consumer protection is also a reason for why it may be difficult for Bitcoin to becomegenerally accepted and viable as a means of payment. Use of Bitcoin for payments
is low today, and although Bitcoin’s future is uncertain, it is an interesting innovation  worthyof description. This article explains what a virtual currency is, and how Bitcoin
works. Bitcoin use in Sweden – which is very limited – is also described. Finally, the future  of Bitcoin and other virtual currencies is discussed. 

Responding to new needs?   

 
Many areas have undergone rapid technological progress in recent years. Our needs in termsof making payments are also undergoing transformation. For instance, households are shopping online to a growing extent, and the amount of cross-border payments is on the rise. Payment solutions, especially for person-to-person payments, have however not evolvedas quickly. Bitcoin can be seen as a response to the lack of such payment solutions andhas often been a topic of discussion in the media, at workplaces and among friends inrecent years. Various factors have evoked curiosity about how the currency works, such asthe supposed anonymity for users, the fact that banks are not involved in the payments
and the ability to make payments worldwide. At the same time, it is difficult to understand whatBitcoin really is, and how it works. I attempt to elucidate this in this article.
I start by explaining what a virtual currency is, the different types of virtual currency that exist, and where Bitcoin fits into that categorisation. I then go on to describe how Bitcoin worksand what we know about its use in Sweden. Finally, I discuss Bitcoin’s benefits and
risks, and the difficulties it may face in future.

 

 

Bitcoin is what is known as a virtual currency.
A virtual currency is a means of payment thatis, units of the virtual currency represent a value. It is intended for use in payments withina specific virtual community, such as a particular website, or in a network of users with special software for managing the virtual currency and making payments. This type of virtual community can thus be said to resemble a voluntary agreement to use a specific itemas a means of payment. This is an important difference to national currencies, such as theSwedish krona. For the latter, it has been established in law that the monetary unit in Swedenshall be called the Swedish krona. The virtual currency thus has a different unit of a

ccount than national currencies. For Bitcoin, the unit of account is the Bitcoin itself.The issuer of the virtual currency can be a non-financial company or even a private
individual, but such an issuer is not under the supervision of a government authority. The issuanceof virtual currency is thus not a government-regulated activity.However, each
virtual currency has some type of rules of its own governing where and how it may be used, and some form of technical infrastructure in which the payments are carried out. Thevirtual currency, the own set of rules and the technical infrastructure combined form small payment system, hereinafter referred to as a virtual currency scheme.
 There are a large number of virtual currency schemes that have been built up, and function, in different ways. They can be broken down into different categories depending
on the extent to which it is possible to buy and sell the virtual currency. Here, we dividethem into virtual currency schemes that are closed, with unidirectional flow and
bidirectional flows. In closed virtual currency schemes, the virtual currency can be neither boughtnor sold, but only earned and used on certain websites (such as World-of-Warcraft Gold). If the virtual currency can be bought for national currency but not exchanged back, thescheme has a unidirectional flow (such as Amazon coins). 

 

When the virtual currency canboth be bought and sold and used outside of a certain website, the scheme has bidirectionalflows. As explained below, Bitcoin is an example of a scheme with bidirectional flows. However, these categories can overlap.Afurther distinction that can be made is whether the virtual currency is centralised
or decentralised. As with banknotes and coins, payments with virtual currency units are madeby means of them changing ownership. The ownership structure must therefore be registeredsomewhere, otherwise it might be tempting for a virtual currency unit holder to duplicateit and use it multiple times. A centralised virtual currency scheme has a centralisedsystemfor verifying and executing transactions, often with the issuer. 

In practice, the latter   administratesall of the accounts through which the payments are made. In a decentralised  virtualcurrency scheme, like Bitcoin, the transactions are instead verified and executed via tahenetwork of users that carry out some form of activity to this end. The right to register 
events is thus delegated to the network’s participants.4
 The decentralised virtual currency  schemesare not uncommonly based on an exchange of encrypted messages and are  thereforeusually called cryptocurrencies. The anonymityand security that this provides are  thefundamental concepts on which Bitcoin rests.